People are still confused about my views on monetary policy and interest rates. First of all, no one should assume that they understand what I’ve said in the past on these issues. This stuff is very nuanced, very counterintuitive, and I’m not a very talented writer. So let’s try to first see what is actually true, and then think about what I’ve said:

1. Interest rates are not a reliable indicator of monetary policy. I’ve said that 100 times.

2. NGDP growth is a reliable indicator of monetary policy. I’ve said that 100 times.

{snip lots of important details}

To summarize:

1. Over long periods of time long term bond yields do tend to track GDP growth (and levels) pretty well. So I’m likely to have made some generalizations in that area equating low rates and tight money. Japan still has tight money! They have low expected NGDP growth. And they still have low rates.

2. As far as the immediate market reaction to monetary announcements, I’ve always argued that it is highly unpredictable, but that there are certain principles that seem useful. An announcement likely to dramatically change the future path of policy is more likely to lead to a ‘perverse’ reaction in bond yields, than would a one-time injection of money. I wish I could say more, but I’m often just as confused as you are.

{snip lots more important discussion]

As you might expect there is much discussion following Scott’s post – where prof. Sumner commented as follows – this is the point of my post (excerpted)

(…) I’ve often said (and so did Arnold Kling) that much of my thesis is nothing but the NK dogma we’ve been teaching our grad students for 20 years (before 2008):

1. Zero fiscal multiplier.

2. Monetary policy drives NGDP

3. Low rates don ‘t mean easy money.

4. Highly expansionary monetary policy is likely to raise long term rates.

5. Fed is never out of ammo, even when rates are zero.

So why did I start blogging? BECAUSE ALMOST THE ENTIRE ECONOMICS PROFESSION SUDDENLY SEEMED TO FORGET WHAT WAS IN MISHKIN’S TEXTBOOK IN EARLY 2009. That’s why I got into blogging. But yes, nothing new here. There are other aspects of MM that are genuinely new, but not the fact that easy money can raise rates.